May 28, 2019

Neptune Wellness Solutions Inc (TSE:NEPT) CEO on Acquiring Hemp Processor SugarLeaf Labs, LLC

Midas Letter
Midas Letter
Neptune Wellness Solutions Inc (TSE:NEPT) CEO on Acquiring Hemp Processor SugarLeaf Labs, LLC

Neptune Wellness Solutions Inc (NASDAQ:NEPT) (TSE:NEPT) (FRA:NTU) is a B2B company producing ingredients, turnkey solutions, and white label products for CPG companies. CEO Jim Hamilton is thrilled with the company’s 2019 performance and the addition of Martin Landry to Neptune’s management team. Hamilton believes the company’s recent deal to acquire North Carolina-based hemp processor SugarLeaf Labs, LLC, is a match with significant synergies. He notes that the SugarLeaf deal provides access to lucrative opportunities in the United States while emphasizing the importance of the passage of the Farm Bill for American hemp processors. He explains that SugarLeaf’s core competency is its large-scale extraction capability, which pairs well with Neptune’s experience providing quality ingredients and solutions for CPG manufacturers. Hamilton believes demand for extracted products is under served in regulated markets and highlights the expandability of Neptune’s Quebec-based facilities.


Narrator: Neptune Wellness Solutions is a health and wellness products company founded in 1998, and is headquartered in Laval, Canada.

The company is engaged in the extraction, purification, and formulation of science-based products.

Neptune Wellness offers speciality ingredients such as Maximil, a patented ingredient that enhances the absorption of lipid-based nutraceuticals and various other marine and seed oils.

In January, Neptune Wellness received its Health Canada license to process cannabis, which allows the company to manufacture and purify cannabis extracts and cannabis oil, and to sell its services to other license-holders.

Production activities are expected to start soon at Neptune’s 50,000-square-foot certified facility in Sherbrooke, Quebec.

Neptune Wellness Solutions is listed on the Toronto Stock Exchange and the NASDAQ, and trades under the ticker symbol NEPT.

[stock_chart symbol=”NEPT:TSX” align=”left” range=”1M”]

James West:   I’m joined now by Jim Hamilton, CEO of Neptune Wellness. Jim, welcome back.

Jim Hamilton: Jim, it’s great to be back. The Jims are together again.

James West:   Yes!

Jim Hamilton: Last time I was here, I think it was Valentine’s Day. And you weren’t here; I was heartbroken.

James West:   [laughter] Well, I’m sorry, Jim. You probably didn’t give me enough notice on that; I would never have left you alone on Valentine’s Day.

Jim Hamilton: A lot of change, again, to the studio, since I was here last; including, you got a new haircut.

James West:   I tend to get those every once in a while. But this is not about me; let’s talk about you. Neptune’s, the stock price has really turned in a great performance, especially since the beginning of the year, and obviously that’s at least in part driven by some of the moves you’ve made in the last few months. Most recently, you announced that Martin Landry has become Chief of Corporate Development; Martin Landry, formerly of GMP.

Jim Hamilton: That’s correct.

James West:   That’s a great strategy: hire the bankers! But probably more pertinent to the actual business is, you’ve acquired a hemp processor, SugarLeaf Labs. Now, just for clarity’s sake, this is not the SugarLeaf cannabis company that is operating in California and Oregon and Washington.

Jim Hamilton: No, very, very, very, very true. James, just from where we started here, what’s gone on since the new year, a lot, I think since the last time we were on your show – first of all, we were happy to get our license in Canada, and we’ve started processing, and the plant is up and running. We’ve had the addition of a couple of really great people to our team, one of whom you just mentioned, Martin Landry – who those in this industry know very, very well, is really the lead and one of the first great industry analysts, and we’re happy to have him on board to help us with strategy.

James West:   I guess I won’t be calling him for an interview anytime soon, at least not from the GMP context.

Jim Hamilton: Also the addition of a wonderful gentleman, Dr. Graham Wood, who is really probably one of the foremost clinicians in the cannabis space here in Canada, who’s been doing a lot of the clinical work – not only in application forms, but on the clinical side, has joined us to lead our as Chief Scientific Officer, which is a great addition.

And lastly, as you just mentioned, the addition of SugarLeaf Labs. They are based just outside of Charlotte, North Carolina, and they’re in the hemp processing business. So James, you know, when we’ve been looking, we believe, a lot in the opportunity that exists in America – we love Canada, but we love the opportunity that exists in America. And with the Farm Bill coming through, both the NASDAQ and the TSX, our insurance companies and bankers, have been supportive. So we’re very happy we announced that transaction just last week.

James West:   So hemp – the acquisition of a hemp processor is obviously to service the value chain in terms of having your own processor in the vertical sort of lineup?

Jim Hamilton: Well, yeah, and look, James, we’re not on the vertical; we’re more interested in the horizontal. So we’re not a cultivator, as I have maybe mentioned to you before, that we don’t have competency in cultivation, but we have a legacy of decades in extraction. You know, the purification and formulation of delivery forms and clinical research; this is what our Omega-3 business and nutrition products business was built on, and similarly with SugarLeaf Labs in the United States, they’re not cultivators. But we love them for so many reasons.

One, they are based in North Carolina, the heart of the tobacco belt. We think the tobacco belt will be a very interesting region to be located in. They have great contacts with the agri community there, which is very powerful. So we think the climate and the agri infrastructure of the tobacco belt will be very conducive to this business.

They also have large-scale extraction that they have built and have brought online as we speak; 1,500 metric tonnes worth. And where I think they saw value in us was a couple of ways: one is, I think people in this industry in the United States don’t have a full appreciation for the quality control standards that CPG companies are looking for. In fact, when we first arrived and were talking to them, they thought we were a little bit crazy, and then they said other customers came through and realized you weren’t crazy, this is what CPG industry needs.

I think they very much appreciated our connectivity to the big brands and CPG companies in the United States in health and wellness and food, and that was very powerful. And I think they also appreciated the fact that we were listed both on the NASDAQ and the TSX. So a great synergy in competencies, and a great opportunity to b ring them together.

And I’m a big believer in this industry in the United States. Again, I think I’ve mentioned, James, when we’ve been together before, it’s larger than the Vitamin E segment; it’s on track to be larger than the Omega-3 sector, and I think it’s a major consumer product category.

We’re also happy to have a footprint in the United States; should marijuana ever become federally legal, we’ll be able to quickly adapt to that.

James West:   Right. So is the opportunity now for Neptune more or less completely focused on the CBD industry that has obviously transformed since it received a different listing from, it’s no longer part of the Prohibited Substances Act, now it’s a regulated substance. So I mean, we’ve just seen an explosion in the different types and modes of CBD available; is that where Neptune is going to dominant?

Jim Hamilton: James, we see our Canadian operation and our facility just outside of Montreal for, I’ll call it, regulated markets, you know, such as Canada and markets that are akin to that, like Europe. So, where it’s highly controlled, regulated. That will be CBD and THC marijuana.

We see America for America. We don’t see moving things across the Canadian border to the United States; we see this American footprint for America, and we see a lot of opportunity there.

I think the CBD market also is a very, very interesting market, because ultimately it will be for chronic consumption; it’s not going to be for when we’re together, or to relax, but it will be for things like pain, inflammation, anxiety, that you’ll probably consume on a daily basis.

James West:   Yeah, that’s interesting. I have started consuming CBD on a daily basis, as much as for an experiment as to just see what the effects are. But because I’ve noticed since I have been doing it that recovery time from workouts are, in fact, as represented, faster, my ability to concentrate for long periods of time on single tasks has miraculously manifested itself once again –

Jim Hamilton: Which is saying something, right? [laughter]

James West:   Right. So just those things alone – and gastrointestinal reliability, I’m going to call it – have made me sort of consider this as a legitimate dietary supplement personally. So I’m a very   much aligned with the way you think that, you know, CBD is the near-term, but you’re saying you’ve also got great opportunities in THC in regulated markets. So is that targeting more the pharmaceutical prescription?

Jim Hamilton: James, my belief ultimately, and actually one of the reasons we initially got into cannabis, because we see this really as a natural products and health products business primarily, and it doesn’t mean CBD is separate and distinct from THC. I think ultimately we’ll see combinations of formulations as science presents itself in terms of what is ideal.

I think in the CBD market in the CPG world, we’ll see a lot of combination products that will be labeled as hemp initially in the United States, but it will be hemp with melatonin; hemp with Omega-3s; and they’ll use the structure function claims that go with Omega-3s, you know, for healthy, you know, bones and joints or inflammation, what have you, and that will be how the products ultimately will be positioned.

And so we’re very excited by that. I think in the controlled markets, we’ll see something similar, but maybe THC being more of an element, there.

James West:   Sure. So is your acquisition of SugarLeaf Labs, then, designed to control costs in the supply chain as it pertains to creating concentrated isolates as ingredients for your products?

Jim Hamilton: James, we’re first and foremost a B2B company. Actually, SugarLeaf does have a small branded business called Forest Remedies that we’ll have to think through how we play that, but first and foremost, we’re a B2B company. And I think when we look at this industry, whether it be Canada cannabis or CBD America, it will ultimately be dominated by CPG brands. And CPG brands are rarely backwardly integrated into the ingredient; they depend on great ingredient companies like DSM, BASF, Lonza, and others to support their business, and I think that’s probably – there’s no reason to think this industry won’t be different in future.

James West:   Interesting. So the cost of products that you produce, you’re – when you say you’re B2B, does that mean you’re selling your products on a white label basis to other businesses?

Jim Hamilton: Yeah, James, I think first and foremost, we process into pure active compound, if you will, and like we do in our nutrition business today, we can take that further and put it into a delivery form and the bottle and the label.

Some CPG companies like the turnkey solution; others that have that infrastructure will take the ingredient. It really depends on which is best for the customer. But I think that is sort of the normal CPG model today, and I think it’s not either/or, but it’ll be a combination thereof.

James West:   I see. So if I’m a CPG-focused business in the medical and wellness space, and I have existing distribution for products, and now I want to add the CBD component, does that mean I can come to Neptune and that’s the business, is that you create the products for us and can package and can white label if necessary, or whatever element of that you need to? Okay, you know, it’s taken me a little while, but I finally understand your business!

Jim Hamilton: The CBD is working. [laughter]

James West:   The CBD is having an effect! Awesome. Okay, so in that context, what does the landscape look like for you competitively?

Jim Hamilton: I think again, there’s two things. I think in the Canadian cannabis context, James, competitively licensed in January; you have a facility that is built and constructed, initial licensing is online and working and pending amendments. What’s important in our Canadian facility is, we have expandability that is up to 6,000 tonnes. This is what we were extracting Omega-3 krill oil on, and we can grow into that. And we’re taking a hard look at that today as we speak.

And one could say, why would anyone ever need that kind of capacity? But I think if you look at the demand profile in Canada and in regulated markets, it’s underserved today. I think there’s a lot of interesting runway being laid out because of the pending legislation for other edibles and whatnot; and remember, we’re 80 percent weed in Canada today, and we have every reason to believe we’ll start to pattern after California and Colorado in future, where the majority will be built on some kind of extract. And I think that negates consideration for hemp demand. Seven percent of Americans are taking CBD hemp now on a regular basis.

James West:   Really?

Jim Hamilton: It’s a major segment.

James West:   And what’s sort of the – where was it at, say, a year ago?

Jim Hamilton: Much smaller. Look, as I mentioned earlier, it’s bigger than Vitamin E, and it’s on track to be as much as Omega-3. So in Canada, I think the demand profile is underserved today, and it will be underserved for a period of time. I think in the United States, so that’s good news, and we’re happy to be part of that. I think in the United States, where the frustration with major brands today is, they can’t get the conversation they need relative to the quality, stability and traceability of the product. And one could argue that’s probably normal, because if you are a marijuana person, that was never a requirement in your business before.

But if you’re going to be on the wall on the shelves at CVS or Walmart or in Whole Foods, you’re going to have to come with a product that is pure and consistent, so it’s 25 milligrams, every bottle, every pill, every capsule, every company, and it’s going to have to be shelf-stable, and it’s going to have to taste good, and all those good things.

James West:   All the things that you’ve been doing for decades.

Jim Hamilton: And I think, James, I think that is the conversation that the major brands are looking for today. That doesn’t mean other companies won’t get there, and as they continue to recognize that, but we think that’s a great advantage in the near-term, is our connectivity to CPG and our appreciation for how that works.

James West:   Right. Interesting. Well, that sounds like you’re really executing a well-thought-out strategy, Jim, and it’s reflected in your share price, which is the best endorsement there is. So let’s leave the conversation there for now, and I’ll look forward to following up with you probably sooner rather than later. Thanks for joining me today.

Jim Hamilton: James, thanks for having us.

James West:   You bet.

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